What the ESM reform provides – Il Post


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The House on Thursday voted against ratifying a reform of the European Stabilization Mechanism (ESM), a tool designed to help eurozone countries facing economic difficulties. The reform was long ago approved and ratified by all other countries that adopted the euro. Only Italy is missing, which until now has always opposed it mainly for political reasons.

The reform that the Italian parliament refuses to approve is actually a very technical problem. The ESM is an important part of the monetary union, which is why it will exist even if the reform never enters into force: it serves to pool the money of all countries and use it when necessary, mainly to prevent the economic problems of a certain state from affecting all others.

All 20 eurozone countries participate in the financing of the ESM and can ask for help if necessary, but this is subject to certain conditions. To get funding, you have to accept a reform plan, the implementation of which will be monitored by the European Commission, the European Central Bank and the International Monetary Fund, three institutions that are often collectively called the “troika”. So far, Greece, Cyprus, Portugal and Ireland have adopted ESM assistance programs during the sovereign debt crisis of 2011–2012.

The plans to which ESM assistance is subordinated may contain unpopular measures designed to consolidate the public finances of the participating countries, such as cuts in public spending, privatization or liberalization. This is also why some political forces believe that the ESM is an excessively bureaucratic and repressive instrument that limits the freedom of individual states in favor of large financial institutions.

The ESM reform, which the Italian parliament has been due to ratify for some time, includes two main changes. The first is the creation of the Single Resolution Fund, which is supposed to help European banks in trouble and is financed by the banks themselves. The fund should have at its disposal 1 percent of all deposits present in European banks participating in the facility, an amount that, according to official estimates, amounts to approximately 77 billion euros. These emergency funds could be used, for example, to secure the current accounts of institutions in crisis and prevent impacts on customers’ savings.

The ESM would thus have at its disposal a valid new tool to manage potential banking crises, a case that became particularly real last spring. Between February and April, several US banks went into crisis and went bankrupt, as in the case of Silicon Valley Bank, or were closed by the US government, such as Signature Bank, and for weeks there were fears that the crisis might spread to Europe (which did not happen ).

– Read also: American banking crisis

The second amendment instead imposes an obligation on countries that decide to apply for ESM assistance to issue specific government bonds with a clause called “single limb CAC” (an acronym that stands for “Collective Action Clauses”) that would allow debt restructuring (i.e. set the agreed reducing the value of a loan given to a country) through a single vote of creditors, rather than using the more complex procedures that other types of government bonds require. This means that a country in trouble may have to pay back less than it owes its creditors.

It is a controversial topic: in the case of countries in a very serious crisis, it would be good because they could avoid collapse and recover more easily. However, there is concern that future investors who are aware of this possibility will end up demanding higher interest rates from countries they perceive to be more at risk, such as Italy.


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